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FILE PHOTO: A British Airways Airbus A320 aircraft sits on the tarmac at Heathrow Airport in London

By Paul Sandle and Alistair Smout

LONDON (Reuters) - Nearly all British Airways (BA) flights were grounded by its first ever pilots strike on Monday, disrupting the travel plans of thousands of passengers in a dispute over pay.

The action by British Airline Pilots Association (BALPA) members forced BA, part of International Airlines Group (IAG), to cancel 1,700 flights to and from London's Heathrow and Gatwick airports during two days of action in its latest high-profile setback.

BA faces intense competition on short-haul routes from easyJet, Ryanair and other low-cost airlines and has faced a number of operational hiccups in the last few years.

"It's going to punish customers, it's going to punish our brand, it's going to punish the rest of the colleagues," BA Chief Executive Alex Cruz told BBC TV as IAG shares dropped by as much as 3% in early trading.

BA has offered its pilots an 11.5% pay rise over three years, which it said would take the pay of its highest earning captains from 167,000 pounds ($205,000), plus 16,000 pounds in allowances, to just over 200,000 pounds.

BALPA wants the pay deal to include profit sharing for BA pilots, who on average earn around 90,000 pounds a year.

"British Airways is going through some good times, we want to share in those profits just as we shared the pain in the bad times," BALPA General Secretary Brian Strutton told BBC TV, adding that while pilots were willing to compromise, BA was not.

BALPA added that no further negotiations with the airline were currently planned.

The union said it would be cheaper for BA to meet its demands than face down the strikes as the action cost it 40 million pounds a day. Analysts had similar estimates, but BA declined to comment on the cost incurred.

The airline dismissed a new offer by BALPA last week as an "eleventh hour inflated proposal" that was not made in good faith. BALPA had said it would have called off the strikes this week if BA had engaged with the offer.

BA's Cruz said the 11.5% offer was "way above" inflation, which stood at 2.1% in July, and already recognized that BA was making money.

"The commitment of everyone at British Airways is to get over this particular dispute as quickly as possible and we urge the union to sit down with us as quickly as we can so we can reach an agreement," Cruz told BBC radio.

He said it was a BA dispute and it would be resolved by the carrier rather than IAG.

SETBACK

The strike is the latest setback for BA, which in August suffered its third major computer failure in little more than two years, disrupting flights in its peak travel period.

It also faces a record $230 million fine under tough new data-protection rules after the theft of data from 500,000 customers from its website last year.

And it has been harder hit by industrial action than Ryanair, which reported no travel disruption after its British-based pilots went on strike this month.

British Airways, however, said it had no detail from BALPA on which pilots would strike, and had no way of predicting how many would come to work or which aircraft they are qualified to fly, so had no option but to cancel nearly 100% of its flights.

Following strikes on Monday and Tuesday, another day of industrial action is scheduled for Sept. 27.

BA has been criticized over its communications with passengers ahead of the strike and the UK Civil Aviation Authority (CAA) is investigating after it wrongly told some travelers their flights had been canceled.

The regulator also reminded BA to tell customers their rights. During the strikes, it must offer reimbursement for canceled flights, alternate travel arrangements under comparable conditions or a new flight at a later date.